The Government Accountability Office, Congress' investigative arm and watchdog, said the U.S. Federal Reserve and the U.S. Treasury have the authority to bail-out the Big Three automakers, marketwatch.com reported Thursday.

Gene Dodaro, acting head of the GAO, said the Fed and Treasury could provide loans to the struggling U.S. automakers under an emergency loan designation.

The above ruling conflicts with the view of U.S. Treasury Secretary Henry Paulson, who has said that the $700 billion in TARP funds administered by the Treasury Department can only be used for financial companies.

However, Dodaro said the TARP legislation "is worded broadly enough" to allow Treasury to lend money to General Motors, Ford, and Chrysler, marketwatch.com reported.

Shares of GM (NYSE: GM) fell 33 cents to $4.57 while Ford (NYSE: F) fell 4 cents to $2.81 on Thursday at mid-day.

U.S. Federal Reserve Chairman Ben Bernanke Monday provided the markets with his latest -- and strongest -- hint about new plans to counteract both the credit crunch and the U.S. recession. Now it looks like the Fed may buy Treasury notes and bonds, and/or agency bonds, in an effort to push interest rates even lower and "spur aggregate demand."

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective," Bernanke said in a speech Monday in Texas. "The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand."

Fed deploying unconventional tools

Bernanke's comments are the Fed's latest hint that the world's most powerful central bank will deploy a 'new tool box' and unconventional techniques that Bernanke has previously said most likely would be needed to help the nation cope with its most serious financial crisis since the Great Depression.

Moreover, although the potential actions announced Monday technically are not quantitative easing, they will have that effect, says economist David H. Wang. Quantitative easing involves increasing the reserves in the banking system after the Fed loses the ability to lower the cost of money from an interest rate standpoint.

The dollar fell, then firmed, against most of the world's other major currencies Tuesday at mid-day, on word of yet another U.S. government intervention to ease the financial crisis. (For full currency data, click here.)

Still, the more important theme, many economists and analysts agree, is how well the dollar has fared given the remarkable increase in debt by the United States and the supply of dollars globally.

The dollar weakened about one cent to $1.3040 versus the euro and about half a cent to $1.5160 versus the British pound on Tuesday at mid-day, after the U.S. Federal Reserve announced it would buy up to $600 billion in mortgage and mortgage servicer-related debt and up to $200 billion in consumer and small business-backed loans, to free up credit in these sectors. The dollar also fell about one cent to 95.53 versus Japan's yen, and about half a cent to $1.1881 versus the Swiss franc.

Under the new programs announced Tuesday, the U.S. Treasury will provide about $20 billion in credit protection to the U.S. Federal Reserve, using money from the $700 billion Troubled Asset Recovery Program (TARP).

In September, the Fed's balance sheet totaled $924 billion, when the first wave of the financial crisis began to freeze credit markets and decimate stock markets around the world. However, if all loan guarantees are accessed, and if all of the remaining $780 billion debt is added to the Fed's balance sheet, that balance sheet would increase to about $3 trillion.

Does the Federal Reserve's lowering of its benchmark, short-term interest rate to 1% represent the end of its ability to stimulate economic growth and / or shorten the U.S. recession?

No, it doesn't. That's because the Fed has another tool in its arsenal: 'quantitative easing.'

Quantitative easing involves increasing the reserves in the banking system after the Fed loses the ability to lower the cost of money from an interest rate standpoint.

The size of the resources available for quantitative easing policy varies on how much money the Fed believes it has to deploy, so says economist David H. Wang. One school argues that the amount of money available is up to a set percentage of U.S. GDP, for example 15% or 20%, he said. However, another school argues that the amount of money available is much larger than that, Wang added.

The Fed's balance sheet has surged to $2.2 trillion this month from about $924 million in September, when the first wave of the financial crisis began to freeze credit markets and decimate stock markets around the world, he said. Further, the Fed's balance sheet is likely to increase as other interventions become necessary to stabilize the financial system. For example, the Fed is on the hook for up to another $240-265 billion as a result of Monday's rescue of Citigroup (NYSE: C).

The weekend is often the time when boards and the government decide the fates of companies and CEOs. It gives everyone involved at least two days, perhaps more, to weigh options and make decisions without the fury of stock market trading. A board of directors can start work on Friday at 4 PM and weigh options until 8 PM Sunday, when Asia opens, or 8 AM Monday if overseas trading is not an issue.

No one with any sense would believe that the board of Citigroup (NYSE: C), the FDIC, the Fed, and the Treasury are not working through this weekend, again. Most of the government people are so exhausted that those who leave with the current administration will be happy to have the rest.

A lot of options have been thrown around. But, the fate of Citi comes down to two things. At this point, the bank is believed to be in such bad shape that putting in a new CEO, even Jack Welch, would make no difference. Chapter 11 would wipe out too many firms that have non-insured deposits at Citi, too many companies that have loans with a bank that could be called, and too many common, preferred, and bond holders in the financial firm would lose everything.

That leaves the government taking over Citi the way it did AIG (NYSE: AIG) or forcing a sale as it did with WaMu or Wachovia (NYSE: WB).

Monday morning cold be quite a drama.

Douglas A. McIntyre is an editor at 247wallst.com.

As Citigroup 's (NYSE: C) shares dropped, it was talking to Treasury and the Fed. That should not surprise anyone. The government knows a failure of Citi would damage the world financial system even further and kill consumer confidence in the U.S. banking system.

According to Reuters, "The bank has met with officials from the Federal Reserve and the U.S. Treasury Department in recent days."

The federal government has a number of options. The best is probably to put more money from the Paulson $700 billion bailout package into the bank. What would Citi need? Only its management and regulators know what its balance sheet looks like. Based on guarantees that FDIC might have made on the Wachovia buyout, the need at Citi could be $50 billion.

Cheap for keeping what was once the world's largest bank alive.

Douglas A. McIntyre is an editor at 24/7 Wall St.

With credit markets remaining under stress, and with uncertainty growing regarding the status of megabank Citigroup (NYSE: C), the U.S. Congress may have to take more action to maintain financial system stability and prevent the U.S. economy from spiraling into a deeper recession, so says economist David H. Wang.

"The U.S. Congress may have to approve a 'TARP 2,'" Wang told BloggingStocks Friday. "Whether Congress does it as part of a fiscal stimulus package, or separately, it is clear we will need more money to purchase toxic assets, improve bank capitalization and allocate funds for home mortgage refinance programs, and other financial stabilization measures. At this stage of the crisis, the $700 billion TARP is not going to be enough, in my interpretation."

Bank sector stress remains

Wang said that if Citigroup, whose CEO Vikram Pandit said has adequate capital, for some reason cannot, when needed, find additional capital in the private sector, then "the Fed and or U.S. Treasury will step in, and take necessary measures to stabilize the bank," Wang said. If the U.S. Treasury is the primary funder, "that action, and other forthcoming, planned actions by the Treasury may use up a considerable amount of TARP funds, requiring a TARP 2."

Once again, Dow 8,000 has come back into focus.

For those investors who may not follow indices closely, the 8,000 level has a psychological but not technical support, the latter of which measures such things as the number of investors who are buying / selling, whether investors are committing more money to the market etc.

Even so, right now, a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls argue that the worst news is behind us, and that government stimulus, fiscal and monetary, will get the U.S. economy moving again.

The Dow Jones Industrial Average Wednesday closed below 8,000 at 7,997. If the bears can keep the Dow below 8,000 and then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion regarding where the Dow is headed, near-term.

The case for a large fiscal stimulus package has received a shot in the arm, but as with so many economic developments during this decade, there's an upside and a downside.

A group of about 100 CEOs has urged President-elect Barack Obama to "quickly implement" a stimulus package of roughly $500 billion. The CEOs said the package should emphasize investment in infrastructure, including roads, bridges and other construction, as well as alternative energy projects. Their second priority: improving education.

Economist David H. Wang has extracted positive and negative threads from the CEOs' statement.

"On the one hand, the added CEO support will be welcome, I am sure, by the Obama Administration, as it builds the case for its stimulus package," Wang said.

"On the other hand, the fact that CEOs are calling for government spending, which is not a traditional CEO stance, tells you about the seriousness of our economic problem," Wang said. "The U.S. economy is in rough shape and there are few signs of improvement."

With apologies to actor William Shatner, How big could the bailout of AIG get? Really big.

The U.S. government -- which is all of us, citizens and taxpayers -- may have to increase its investment in American International Group (NYSE: AIG) by still another $70-80 billion to keep the insurer solvent through the end of 2009.

Just call it USG-AIG

AIG, which reported $43 billion in losses tied to home mortgages in the past quarter, "will probably not function properly if it doesn't receive another cash infusion by September 2009," economist David H. Wang told BloggingStocks Tuesday. Wang based his forecast on his projection for cashed-in credit default swaps stemming from home mortgage defaults.

AIG is a major issuer of credit default swaps, actually a type of credit default insurance, which many holders of mortgage backed securities and bonds purchased to hedge against bond issuer defaults.

"If we project a rise in home mortgage defaults through Q2 2009, that will likely take credit default claims to levels that will require more money for AIG in late 2009," Wang said, although he qualified his projection by stating that it is contingent on negative U.S. GDP for Q1/Q2 2009. A U.S. economic recovery in Q2 2009 is possible, but not likely, Wang said.

AIG's shares fell 15 cents to $2.14 on Tuesday at mid-day, amid a broader market sell-off.

Short-term interest rates continue their downward trek.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Thursday -- down -- as private banks were encouraged by the U.S. Federal Reserve's interest rate cut and $120 billion in new swap lines with emerging market central banks.

The London rate for three-month loans in dollars declined for the 14th consecutive day, dropping another 23 basis points to 3.19%. Rates also fell in Asia: the three-month rate for Hong Kong, the HIBOR, dropped 15 basis points to 3.39%.

Meanwhile, the London interbank overnight rate, or LIBOR, plunged another 41 basis points to 0.73% - - its lowest level since January 2001.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

A year ago, few in the currency market would have predicted this stunning reversal in the flow of capital.

Despite being the nation that's likely to bear the largest economic and fiscal costs -- including a huge increase in its budget deficit and national debt -- from the global financial crisis, institutional investors are turning to the U.S. dollar in a flight-to-safety that economists say shows few signs of ending soon.

Investors flee to the dollar

That's right: you read correctly -- investors are turning to the dollar as a safe haven. Despite a decade of budget and trade deficits that drove the dollar to records lows. Despite an uncertain (at best) immediate economic outlook (the U.S. will be oh-so-fortunate to experience only a mild recession). Despite disagreement in the nation over the best way to pay for the many rescues / interventions needed to end the crisis. Despite the uncertainties presented by the upcoming U.S. Presidential / Congressional election. Despite its inadequate infrastructure and underdeveloped industrial base.

Despite all of the above, institutional investors abroad want: dollars. Money is flowing out of emerging markets and into the dollar -- so much that the major central banks may very well have to intervene repeatedly to support emerging market currencies to prevent further global financial system destabilization. Institutional investors are also flocking to Japan's yen, due to that country's relatively lower exposure to toxic assets.

If the stock market is the thermometer of the economy, then the credit market is the life blood. And lately there are signs that the U.S. economy's circulatory system is improving.

Sales of commercial paper have increased considerably since the U.S. Federal Reserve launched its Commercial Paper Funding Facility (CPFF) to jump-start the corporate, short-term lending market, Bloomberg News reported Wednesday. Commercial paper sales totaled $67.1 billion on Monday, October 27, the first day of CPFF operation, and $41.6 billion Tuesday, compared with last week's daily average of $6.7 billion.

CPFF is working, so far

Economist David H. Wang told BloggingStocks Wednesday he likes what he's seeing regarding commercial paper flows this week.

"This is very encouraging, maybe our most important credit data point since the financial crisis started. The Fed's commercial paper facility is having its intended effect. If the trend continues, it points to a near-normalization of this critical market. Interest rates will be higher, but the fact that money is flowing is another positive step."

Short-term rates, including rates for commercial paper, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt, etc.

The thaw in short-term interest rates continues.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down -- as private banks were encouraged by commercial paper purchases by the U.S. Federal Reserve and a likely interest rate cut later today.

The London rate for three-month loans in dollars declined for the 13th consecutive day, dropping 5 basis points to 3.42%. The three-month rate for the euro, the Euribor, also fell 2 basis points to 4.83%, and the three-month rate for Hong Kong dollars, the Hibor, dropped 30 basis points to 3.54%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

It was once said of Joe DiMaggio, The Yankee Clipper, that he was so solitary and shy off the field that 'he led the league in room service.'

Well, the U.S. Federal Reserve 'leads the league in creating facilities.' The Fed Tuesday said it will help finance the purchase of assets from money-market mutual funds hurt by redemptions from investors fleeing to safer investments, such as U.S. government bonds.

Fed focuses on money market liquidity

The Fed has created a Money Market Investor Funding Facility (MMIFF), "which will support a private-sector initiative designed to provide liquidity to U.S. money market investors," the Fed announced Tuesday.

Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less, the Fed said. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.

JP Morgan Chase (NYSE: JPM) will administer the five special units that will buy certificates of deposit, bank notes, and commercial paper with a remaining maturity of 90 days or less, Bloomberg News reported Tuesday. The Fed will make up to $540 billion available for purchases.

Economist David H. Wang told BloggingStocks Tuesday this latest facility "should further increase liquidity."